Testing for Group-Wise Convergence with an Application to Euro Area Inflation

JEL codes: 
C32, E31
Version Date: 
Dec 2008

We propose a new procedure to increase the power of panel unit root tests when used to study
convergence by testing for stationarity between a group of series and their cross-sectional means. Although each differential has non-zero mean, the group of differentials has a cross-sectional average of zero for each time period by construction, and we incorporate this constraint for estimation and when generating finite sample critical values. We find strong evidence of inflation convergence soon after the implementation of the Maastricht treaty and a dramatic decrease in the persistence of the differential after the occurrence of the single currency.

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